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Rental income to FI RE earlier
Old 08-15-2007, 09:39 PM   #1
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Rental income to FI RE earlier

My first post! Hooray for me.

Anyways, I've built what I consider a strong investment portfolio and would like to venture out into real estate by buying a rental property and try my hand at being a landlord. I'm a little nervous because I've heard horror stories about terrible tenants and I was hoping some of you who own rental properties could tell me if you think the hassles of being a landlord out weigh the positives of an appreciating (hopefully) property that generates additional income.

Also, if you've used rental income to FI RE already, I'd like to hear your thoughts as well.
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Old 08-15-2007, 10:10 PM   #2
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Can't comment yet... as the renters have only been in the property a few weeks and already brought in fleas and have blamed the property. No way to prove the fleas were brought by them (though all the evidence is obvious), so I'm stuck picking up the bill for the exterminator plus a week of rentback.

Hopefully, this problem will not be recurring. Otherwise I will be another one of those people telling horror stories!

That said, I would like to get into rental RE at some point as another asset allocation.
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Old 08-15-2007, 10:19 PM   #3
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Welcome to the board, Eyerish.

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Originally Posted by Eyerishgold View Post
Also, if you've used rental income to FI RE already, I'd like to hear your thoughts as well.
The rental income is great, but those rental expenses sure can delay the desired result.

We've largely backed into landlording (easier to out the first house than to sell it) and we're looking for the exit. The marginal profits & flattened appreciation aren't worth the risks or the downside and our family members are no longer interested in using the place.

If you haven't already, search the threads on this board for keywords like "landlord" & "rental". I'd also recommend that you read the books (1) "Investing in Real Estate", 4th edition or later, by Andrew McLean & Gary W. Eldred (who's taken over the new editions) and (2) "Landlording" by Leigh Robinson (7th edition or later).

If you're still committed to being a landlord then I'd also recommend watching the classic movies "Pacific Heights" and "Money Pit". They were made by comedians but if you're a landlord then it's hard to laugh...

Our perspective is somewhat pessimistic because our ER comes from a military career and sustained superior LBYM and not so much from real estate. However Arif has a much brighter outlook, and he'll be along shortly to tell you how they did it.
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Old 08-16-2007, 07:39 AM   #4
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However Arif has a much brighter outlook, and he'll be along shortly to tell you how they did it.
I wouldn't say brighter outlook as I have been mostly selling this year. To have the best chance at making money in rentals you have to buy as low as you can. Look for foreclosures and get ready to get your hands dirty. If you have to hire out all the repairs and management then it's going to be difficult to make a profit. The majority of the money we made on rentals was not from the rents but from getting good deals and later selling them for a profit. We've sold 9 properties this year alone and each time investors were willing to pay more than we did for less cashflow (their higher mortgage).
I would also mention that if you buy a house to live in and turn it into a rental it can be hard to make money since there was no analysis to determine if it would make a good rental before the purchase. Sort of like buying a Camry and then deciding you want to turn it into an off road vehicle. Sure it can be done but it won't be easy or cheap. When we moved to Panama we rented our house in Georgia and guess which one of our rentals makes us the least amount of money?
I agree with Nords do your research both in books and your local market to see if it even makes sense where you're located. Some markets it won't be profitable to invest in real estate while others are wide open.
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Old 08-16-2007, 08:52 AM   #5
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E-gold,

I do not have expereince with residential rentals, but have owned commercial and storage rentalproperties for about 12 years. Now that the debt is getting gone, they are generating income sufficient for me to FIRE. spending some10-15 hours per week managing them.

I have/do consider the possibility of residential rentals as an additional income stream when I FIRE. I've asked a number of landlords and former landlords, and while the the former landlords seem to have hated the hassles, and the active ones seem to think it's ok, and they stress the importance of carefully screening tenants.

If you have the time and temperament to deal with tenants, mainteneance, and such things, I would not necessarily write it off as a bad thing. Lots of people make lots of money landlording, though not usually overnight.

Just my view.
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Old 08-16-2007, 08:53 AM   #6
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The hardest part of entering the rental market today will not be tenant headaches ... it will be finding a property with a positive cashflow. A good rule of thumb I've had success with is paying the mortgage with half the rents. Reason being, the other half will go to vacancy (5%), taxes (12% here), maintenance (15%), water (2%), insurance (2%); the rest is PROFIT (that's you went into this for RIGHT?).

Find a property where 1/2 the rents pay the mortgage and you'll be ok. Tenant headaches come later ... but will be alot easier to face if you're making a PROFIT!
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Old 08-16-2007, 10:23 AM   #7
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We've been doing rental realestate for a couple decades. Bought ragged places, often on owner-carry-contracts, and dumped $$$ and lots of our own labor into making them something we felt good about renting out. The rentals acted like a big savings account, also like a job we were buying. Spare money above LWBYM went back into the rentals. At 57 we are now about 3% stocks/bonds, 25% money market/cd/secured loans, reaminder rental properties/home. I have not been buying property for the last 7 years or so, but imagine that there may be buying opportunites in the next couple years. Given that the market has gone from 14000 to 12750 recently that's where I'm starting to think about shopping for investments. Getting lazy(er) in my elder years and rental property done for profit is plenty of work.
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Old 08-16-2007, 10:28 AM   #8
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Let's assume that I do all the proper research and find what I feel is a great investment property. How should I finance the rental? If I can't generate cashflow by financing with a plain vanilla 30 yr fixed, should I go more exotic like with a 10 yr interest only so I can generate some cash flow or should I not buy the property if it can't generate cash flow with a plain old 30 yr fixed?
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Old 08-16-2007, 10:38 AM   #9
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Let's assume that I do all the proper research and find what I feel is a great investment property. How should I finance the rental? If I can't generate cashflow by financing with a plain vanilla 30 yr fixed, should I go more exotic like with a 10 yr interest only so I can generate some cash flow or should I not buy the property if it can't generate cash flow with a plain old 30 yr fixed?
Exotic is for when the returns justify the risk. Appreciation? I'm doubting it in any appreciable amount for the next few. What you need is a good owner carry contract. Pretty rare, but I know this Oregon landlord who has this fully occupied 7-unit with a new roof/windows, and paint.......
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Old 08-16-2007, 10:43 AM   #10
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Well you've got the rent coming in. Subtract off all of the expenses (Mortgage, taxes, maintenance etc). If you've got a positive cash flow then great. If not the growth rate of the property must be greater than the lost cash flow plus the lost opportunity cost of the tied up money.

The acid test is to compare what a reasonable growth rate in the property (less expenses) to what could be achieved in a passive investment like a stock-bond portfolio.

If you time buying the property just before prices take off then you will make a bundle. If you time buying the property when prices are declining or are stagnant then you will have made a not so good investment.
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Old 08-16-2007, 11:00 AM   #11
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I've made mone in the stock market and I've lost money in the stock market. When I was first learning how to invest, I made alot of mistakes. It seems to me that a mistake in the stock market is much easier to fix than a mistake made buying rental property. How do I avoid making the BIG mistake with my first rental purchase?
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Old 08-16-2007, 12:10 PM   #12
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How do I avoid making the BIG mistake with my first rental purchase?
Are you asking this question before reading the books, or after?
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Old 08-16-2007, 12:17 PM   #13
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.... How do I avoid making the BIG mistake with my first rental purchase?
Don't buy property over the internet from Oregon multi owner/sellers.
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Old 08-16-2007, 12:42 PM   #14
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I've made mone in the stock market and I've lost money in the stock market. When I was first learning how to invest, I made alot of mistakes. It seems to me that a mistake in the stock market is much easier to fix than a mistake made buying rental property. How do I avoid making the BIG mistake with my first rental purchase?
You are exactly right. Mistakes in real estate can be way more expensive that stocks to fix. This is why it's so important to buy rentals like Tyran said. I think you should also buy properties that are atleast 75% below market. These two criteria will enable you to weather any mistakes and also the ability to pull funds out of it in a real emergency.
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Old 08-16-2007, 04:17 PM   #15
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If you've got a positive cash flow then great. If not the growth rate of the property must be greater than the lost cash flow plus the lost opportunity cost of the tied up money.
Positive cashflow = success
Negative cashflow = failure

Ferget about appreciation going forward .... if it happens GREAT; if not, so what (you've got a positive cashflow). Buying based on future projections of appreciation is a fools game in rental real estate.
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Old 08-16-2007, 05:24 PM   #16
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My first thought when I saw your post was, “DON’T DO IT!!” Then I thought about my own experience. The answer is, it depends.

I’ve owned rental property for over 30 years. You didn’t say how soon you wanted to mine the excess cash flow. If it’s immediately so as to retire, then what do you mean by “retired.” Multi-unit complexes generate more cash, but they take more work than a single-family house. You’ll need to be around to handle problems, UNLESS you can purchase a large enough multi-unit apartment to hire someone to watch it and fix things. That assumes you can find that reliable person. Minimum rule of thumb: 20-units.

Be ready to buy, and don’t balk if you find one that works. Do all your mental homework BEFORE you start looking so you can tell the difference between a pig in heavy makeup and a true winner. Having a PhD in Finance with electrician, plumber and hvac licenses would be helpful. That’s just to buy it. Then a PhD in Psychology to scope out the tenants would be useful.

Nords has offered you help in book titles, and others have given of their experiences, good and bad. Read and learn all you can before you start. It really gets down to this: do YOU want to do it. If your heart is in it, and you want to make it work, you can.

A short story. On volunteer day in 1968 at OCS, Newport, RI, all the graduating officer candidates had to listen to recruiter representatives from submarines, UDT, aviation etc. I only remember one comment from that day. The recruiting officer from Naval Aviation said, “ If you want to fly more than anything on this earth, and I mean ANYTHING, then I want to talk to you. But, if you don’t, go do something else. I don’t want to talk to you.” I went into destroyers, loved it. Learned to fly on my own after I got out. Loved that too.

Do you REALLY want to own and manager rental property?
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Old 08-16-2007, 07:20 PM   #17
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30 year notes on mortgages are not that easy to get.
Creative financing will be a lot tougher as well.
Most banks rule of thumb is 80% LTV.
One should not get into the landlording game for instant profit,it's usually not there.
The profit is in the future appreciation of the units.
This is a very tough market out there now.Most good tenants have bought homes,the ones that are left are so bad that even a shyster mortgage loan officer could not get them papered.

Once the dust from the current fiasco settles the tenant pool should improve and some nice buys should be on the market.

One other thing to remember..........LOCATION,LOCATION,LOCATION.

My units were in a good location 20 years ago when Ohio still had jobs.As the job prospects eroded,so did the tenant pool.
Today if I get a call from someone making $11.an hour,I'm all ears,then all eyes on the muni court site to see how many evictions they have had.
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Old 08-16-2007, 08:20 PM   #18
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I just got back from vacation and need another vacation to hide from this week's stock and real estate market.
I sorted of became a landlord by accident 20 years ago.
We couldn't sell our 1st home for the price we wanted so decided to rent it out. I was not at all analytical about it.
I just knew we didn't owe much money on it so even if it made zilch income we can carry it forever. To make a long story short, several houses later, my ex and I splitted.
Then in 1999 I sold my home and bought a duplex and moved in one side. This time I did extensive analysis and what-if scenarios. The real benefit of a spread sheet analysis is one can validate every assumption.
Somehow, it was easier to go forward when I know even the worst case scenario isn't going bankrupt me.
But in hindsight, I got lucky since I got in before prices took off. I moved out of that property and bought another home and sold that home recently.
With today's home prices in my area, it would have to fall quite a bit more before investing in rentals make sense.
Prices got so disconnected from rent that it was the flashing red sign of housing bubble.
BTW, I do most of the repairs and my pickup looks like a contractor's vehicle sometimes.
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Rental income to FIRE earlier
Old 08-17-2007, 12:10 AM   #19
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Rental income to FIRE earlier

OK
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Old 08-17-2007, 03:12 AM   #20
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Quote:
Originally Posted by Eyerishgold View Post
I've made mone in the stock market and I've lost money in the stock market. When I was first learning how to invest, I made alot of mistakes. It seems to me that a mistake in the stock market is much easier to fix than a mistake made buying rental property. How do I avoid making the BIG mistake with my first rental purchase?

That not even an Apples and Oranges comparison... more like apples and motorcycles.


I am not a landlord/rental owner... but I observed my father doing this with apartments. Think about it long and hard before you make the decision.

IMHO - The small guy can make money using rental real estate. However, scale matters. If you cannot create a lot of scale, you are likely to just be buying your self a job and taking some risk (via the loan).

Plus, if you do not have the temperament for it you will be unhappy.

On the investment property side of things. Real estate takes money to maintain. Unless you have something that appreciates very quickly, your net appreciation (after all expenses) will not be stellar.
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